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Southern Company Mounting IPO

Southern Company Mounting IPO

Frustrated by its inability to attract investors because they view it as a stodgy utility, Southern Company last week announced a makeover in the form of a spin-off and IPO to create a separate company for most of its non-utility businesses.

Atlanta-based Southern said it will sell 19.9% of the new company to the public and spin off the rest to shareholders.

Southern, along with other energy companies, has taken a beating in the stock market as investors have flocked to technology and dot-com stocks. The company's shares fell 19% last year. Southern also said it is planning to spin off to holders of Southern Company common stock the remaining ownership of Southern Energy within 12 months of the initial public offering. The spin-off would be subject to a number of market and other conditions.

These transactions would create two large stand-alone publicly traded energy companies: Southern Company, the leading electric utility in the southeastern United States, and Southern Energy, one of the largest independent power producers and energy marketers in the world.

Within a few weeks, Southern Energy expects to file a registration statement with the Securities and Exchange Commission for the initial public offering of Southern Energy shares. The offering is expected to take place in late summer or early fall.

"The initial public offering and the subsequent spin-off will provide a clean separation of our traditional southeastern operations and our global unregulated energy business," said Southern CEO A.W. Dahlberg. "The transactions will give the investment community the opportunity to assign more appropriate stand-alone valuations to each company and make more focused investment decisions. The separation also will enable each company to focus on its core strengths.

Dahlberg said Southern is committed to maintaining its current annual dividend of $1.34/share and to grow the dividend over time consistent with earnings expectations. Following the spin-off, Southern's target will be to grow earnings per share at an average annual rate of 3 to 5%.

In response to the news, Duff & Phelps Credit Rating Co. (DCR) placed its ratings of Southern Energy and Southern Energy North America Generating on Rating Watch-Down. "The rating actions reflect the elimination of the implicit financial support of Southern upon completion of the pending IPO and spin-off. The credit quality of SEI and Generating has to date benefited from Southern's implied support via significant capital investment as well as SEI's strategic significance to Southern's growth initiative." DCR said will undertake a more complete review of SEI shortly and noted Generating's credit quality would be less impacted by the transaction than that of SEI.

Southern also reported a 9% increase in first-quarter earnings, reflecting growth in both its regulated electricity business in the Southeast and in its Asian business units. Southern reported earnings of $245 million in the first quarter compared with $224 million during the same period last year. Revenues for first quarter 2000 were $2.6 billion compared with $2.4 billion in 1999's first quarter.

Southern's five integrated utilities in the Southeast reported $176 million in first quarter 2000 net income, compared with $168 million for the same period last year. Higher energy demand, an increased customer base and a growing wholesale energy supply business in the Southeast contributed to the increase.

Southern Energy Inc., the subsidiary that includes Southern's international operations and its competitive U.S. energy supply business outside the Southeast, reported $101 million in first-quarter 2000 earnings, compared with $88 million for the same period last year. Its increased contribution to net income was due in large part to growing profitability from its Asian business units. Asian investments contributed $83 million in first-quarter 2000 earnings, compared with $51 million for the same period last year.

Southern's earnings for the 12 months ending March 31 were $1.3 billion, compared with $959 million for the 12 months ending March 31, 1999.

Reviewing operations, Dahlberg said electricity use by retail customers in Southern's traditional service area in the southeastern United States increased 4.5% to 33.9 billion kilowatt-hours the first three months of 2000. In-home electricity needs were up 3.9% to 9.8 billion kilowatt-hours. Electricity consumption by commercial customers - offices, stores and other non-manufacturing firms - rose 7.5% to 10.1 billion kilowatt-hours. Industrial energy use increased 2.9% to 13.6 billion kilowatt- hours. Total sales of electricity to Southern's customers in the Southeast, including sales to other utilities, increased 7.1% to 39.1 billion kilowatt-hours the first three months of 2000.

Joe Fisher, Houston

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